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Exam 12: S Corporations

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Question 21

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Which, if any, of the following items decreases an S corporation's AAA?

A) Section 1231 loss.
B) Expenses related to tax-exempt income.
C) Depletion in excess of basis.
D) Distribution from earnings and profits.
E) None of the above affects the AAA.

F) B) and C)
G) None of the above

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Question 22

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An S election is made on the shareholder's Form 2553.

A) True
B) False

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Question 23

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Discuss the two methods of allocating tax-related items to S corporation shareholders.

Mock Corporation converts to S corporation status in 2016. Mock used the LIFO inventory method in 2015 and had a LIFO inventory of $435,000 (FIFO value of $550,000) on the date of the S election. How much tax must be added to Mock's 2015 corporate tax liability, assuming that Mock is subject to a 35% tax rate.

A capital loss allocated to a shareholder always reduces the Other Adjustments Account.

An S shareholder's basis is increased by stock purchases and capital contributions.

An item that appears in the "Other Adjustments Account" affects stock basis, but not AAA, such as tax-exempt interest.

An S corporation with substantial AEP records operating revenues of $410,000, taxable interest income of $390,000, operating expenses of $260,000, and deductions attributable to the interest of $150,000. The passive income penalty tax payable, if any, is:

The § 1202 exclusion of gain is not available on disposition of S corporation stock.

The maximum number of actual shareholders in an S corporation is:

An S shareholder who dies during the S corporation tax year must report his or her share of the pro rata income (loss) items up to the date of death, on the final individual tax return.

There is no need formally to elect to treat ____________________ members as a single shareholder.

An S corporation cannot be a shareholder in another corporation.

Pass-through S corporation losses can reduce the basis in the shareholder's loan to the entity, but distributions do not reduce loan basis.

Identify a disadvantage of being an S corporation.

Chris, the sole shareholder of Taylor, Inc., elects during 2016 to terminate the S election, effective January 1, 2017. As of the end of 2016, Taylor, Inc., holds AAA of $120,000 and OAA of $13,000. Chris receives a cash distribution of $130,000 on January 15, 2017. If his stock basis is $220,000 before the distribution, calculate Chris's taxable amount and his ending stock basis.

Advise your client how income, expenses, gain, and losses are allocated to shareholders of an S corporation.

Discuss two ways that an S election may be terminated.

An S shareholder's basis is decreased by distributions treated as being paid from AAA.

The choice of a flow-through entity for a closely-held corporation often is between a(n) ____________________ (a Federal tax entity) and a(n) ____________________ (a state tax entity).